Famed investor John Templeton once remarked, "The four most dangerous words in investing are: This time it's different." It's an acknowledgment that investing tends to follow certain timeless rules, and that investors often become too bullish about the prospects of any high-flying asset.
That's what has me so concerned about Bitcoin (BTC 0.49%) right now. There's a growing sense that Bitcoin has somehow outgrown its historical boom-and-bust cycle, and that severe market corrections are now a relic of the past. But is that really the case?
The four-year Bitcoin cycle
Long-time Bitcoin investors recognize that the world's most popular cryptocurrency tends to follow four-year cycles. Each cycle is further subdivided into four distinct phases. There's a period of accumulation, followed by a period of rapid growth, a bubble, and then a crash.
The timing of this cycle might seem arbitrary, except for the fact that Bitcoin has a halving event every four years. This halving, which cuts in half the rate of new Bitcoin creation, is what leads to the period of rapid growth. If you know the date of the halving, you can basically add 12 to 18 months, and that's when the "bubble" phase should be coming to an end.
The last Bitcoin halving took place on April 19, 2024. If history is any guide, the current period of Bitcoin growth should be coming to an end sometime around October of this year. If we're lucky, the price of Bitcoin could hold its ground until January 2026.
You can see where I'm going with this -- we're "due" for a market correction. If Bitcoin follows its historical pattern, then the four-year cycle should be wrapping up relatively soon. And that means a significant market correction (or something worse) could be incoming.
"This time it's different"
The typical response to this, of course, is: "This time it's different." This is the first cycle, for example, when the spot Bitcoin exchange-traded funds (ETFs) have existed. This is the first cycle when a Strategic Bitcoin Reserve has existed. This is the first cycle when the Bitcoin treasury company model has been in vogue. This is the first cycle when the U.S. government is supporting pro-Bitcoin policies. This is the first cycle when risk-averse institutional investors such as pension funds are buying Bitcoin.
Image source: Getty Images.
You could probably list several more factors that are "different" this time around. But think back to what Templeton said decades ago. There are certain timeless truths about the financial markets that you simply can't ignore. And one of those is that financial assets can't defy gravity for long. What goes up must come down.
The Bitcoin bulls will reject this line of thinking, of course. Michael Saylor, the founder and executive chairman of MicroStrategy (MSTR 3.04%), recently told Bloomberg TV in an interview: "Crypto winter is not coming back. We're past that phase." Saylor discounts the chances of any significant pullback, and is confident that Bitcoin will continue to soar in value. Saylor's new price target for Bitcoin is a head-spinning $21 million per coin.
Ignore the history of Bitcoin at your own peril
For any investors new to Bitcoin, I would highly recommend familiarizing yourself with the four-year Bitcoin cycle. Take a good, hard look at the long-term chart of Bitcoin. You'll see that Bitcoin has had several drawdowns of 77% or higher throughout its history. Moreover, even bullish periods of the cycle have experienced significant market corrections.
In short, the price of Bitcoin has never gone straight up. During the previous crypto bull market cycle, the price of Bitcoin hit a (then) all-time high of $69,000 in November 2021. Twelve months later, the price of Bitcoin was $16,000, a decline of 77%. The price of Bitcoin later recovered, but some crypto investors were wiped out.
Admittedly, the volatility of Bitcoin is lower these days, and the pullbacks appear to be less extreme. Even when Bitcoin fell to $75,000 earlier this year, it quickly recovered. Over the long haul, I have no doubt that Bitcoin will continue to march higher. Maybe it will one day hit the mythical $1 million mark.
However, I'm still not convinced that Wall Street has figured out Bitcoin, and that it's up only from here on out. If you buy into the logic of "this time it's different," you may be setting yourself up for disappointment later.
